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Current Position:Home » News » Processed Foods » Savory Snacks » Topic

Tyson building a prepared foods powerhouse

Zoom in font  Zoom out font Published: 2014-06-11  Views: 10
Core Tip: While Tyson Foods has won the rights to acquire Hillshire Brands, hurdles still stand in the way of a completed transaction.
Tyson Foods’ bid to acquire Hillshire Brands for $63 per share in cash plus the assumption of debt for a total transaction value estimated to be $8.55 billion underscores how important it is to the company to grow its Prepared Foods business unit.

During 2013, Tyson Foods executed three acquisitions designed to support and grow Prepared Foods. The deals included Don Julio Foods, a maker of flour and corn tortilla chip products in February 2013; Circle Foods L.L.C., a maker of handheld Mexican foods in June 2013; and Bosco’s Pizza Co., a manufacturer of par baked frozen pizzas and pizza sticks in January 2014. Each added value to the company’s portfolio of prepared foods products, but none approached the size and scale Hillshire Brands offers the company.

“With the acquisition of Hillshire Brands, not only would Tyson Foods have the number one brands of chicken and stack-pack bacon, we'd also have the number one brand for sausage, breakfast sandwiches, hot dogs, corn dogs, and super-premium sausage,” said Donnie Smith, president and chief executive officer, on June 9 during a conference call with securities analysts to discuss the company’s winning bid. “We're looking forward to combining Tyson and Hillshire to create a $40 billion consumer-centric insights-driven marketing organization that will position us as a clear leader in retail prepared foods with iconic brands.”

Mr. Smith said Tyson’s analysis shows that based on pro forma data for the 12 months ended in March, the addition of Hillshire Brands would double Tyson’s Prepared Foods sales from 18% of revenue and quadruple operating income from Prepared Foods from 5% to 20%.

“Hillshire would aid our ability to stabilize earnings by increasing return on sales and de-commoditizing our business,” he said. “So again, this would be a huge leap forward in growing our Prepared Foods segment, not to mention the gains to be made in combining our two companies’ considerable talents and resources in R.&D., innovation, consumer insights, and sales and marketing.”

Mr. Smith added Hillshire Brands has been on Tyson’s radar as an acquisition target for some time.

“A couple years ago we began working with our board and advisors to do a complete assessment of ways to grow our company,” he said. “That assessment involved a deep dive on what we aspire to be in prepared foods.

“What we wanted was to have the number one or number two brands at retail because that’s really key to maximizing the supply chain and creating the kinds of returns we want. So we cast a wide net and we looked at a number of significant opportunities and put them through various filters. And the company that kept coming out on top was Hillshire.”

Analysts on the call noted that if the acquisition goes through, Tyson Foods will be paying a premium for Hillshire Brands. The analysts asked for specific information about synergies and where savings may be found. Mr. Smith said Tyson expects to accrue $300 million in synergies initially.

“On the synergy side, as we look at creating, continue to create, by the way, we still have in our business a very, very large temperature control distribution network,” he said. “And so as we fold in this very large both frozen and refrigerated distribution network, we think there's significant opportunities there to gain some synergies.

“Also, when you combine these two great companies, we think there's opportunities in the spin, whether it's for the raw materials that we might use in the manufacturing process or if it's in other spend areas that revolve around marketing efforts.”

He added there are additional opportunities to extend Hillshire’s reach beyond traditional retail channels to convenience stores and even school food service.

“… We looked both at the synergies, but also the growth potential, when you combined these two and looked out in a forward view, that's where we put forth an acquisition at a value that creates shareholder value and significant shareholder value over time,” Mr. Smith said. “As you know, brands like Hillshire and Jimmy Dean and Ball Park, they don't come available very often.

“This acquisition accelerates our growth in the prepared foods. We’ve been very focused on both prepared foods and value-added chicken as the accelerators in our growth strategy. And it really puts us in an opportunity to create significant shareholder return. We are purchasing these assets not only for what they are today, but for their potential to create additional value over time in our portfolio.”

In Mr. Smith’s view, there are also opportunities to extend Hillshire Brands’ portfolio overseas.

“We do not see the demands for protein contracting in the future,” he said. “I think demand worldwide for protein is going to continue to grow at about, say round numbers, around 2% a year. We think most of that growth is going to come outside of the U.S. So international is still a very important part of our future.”

While Tyson Foods has won the rights to acquire Hillshire Brands, hurdles still stand in the way of a completed transaction. Most notably, Hillshire Brands and Pinnacle Foods Group must terminate the agreement for Hillshire to acquire Pinnacle that was entered into on May 12. Until then, nothing further may happen to move the Tyson, Hillshire transaction along.

 
 
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